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Prepare

Credit Underwriting

Taking risk for a fee
Process of appraisal, financial analysis to know the credit worthiness of borrower so that banks can give loans after proper due diligence and analysis

5 C’s

Character — check Cibil score — whether any non compliances of Rbi regulations

Capacity — verify analyse Financial statements — conduct ratio analysis — Debt to income ratio

Capital

How much own capital does the business man (borrower) is investing by himself—- the greater it is less risk for banks

Collateral

Assurance that bank can sell the collateral and majority part of loan back

Conditions

Are the General conditions like these many yrs in job— Industry conditions— are they ok

KYC
KYC involves steps —- to establish customer identity/his activities—whether legitimate
Standards set to provide protection for financial institutions against fraud

KYC Docs – individual
Voter ID, AAdhar, PAN, License, Passport
KYC Docs – Entities
kyc-document-business.pdf (kvb.co.in)

KYC Doc – Sole proprietorship
Registration Doc, Income tax return, GST Reg certificate, PAN of proprietor

KYC Doc – partnership firm
Partnership deed, PAN of firm, Income tax return, GST returns, GST reg certificate, POA, PAN of main partners, partner (POA)

KYC Doc – LLP

Certificate of incorporation incl LLPIN, DPIN of Designated partners/persons (POA), LLP 
agreement, Proof of Identity/PAN of designated partners/Persons(POA)

KYC - Companies

Certificate of inc incl CIN, MOA/AOA, Proof of identity/PAN of managers/officers holding POA,List of dir with DIN

GSTR 1. declare revenue/sales and output GST payable 
GSTR 3B. deduct ITC auto populated from GST output payable and pay net GST payable

GSTR 2B…shows or restricts ITC to be claimed for a particular month

GSTR 9….annual return …. taxpayers whose turnover exceeds 2 crores
Due date. 31st December of following FY

GSTR 9C…. reconciliation statement…. applicable if taxpayers turnover exceeds 5 crores
Self certification…no need of GST audit and certification by a CA

CIBIL
Full Form — Credit information bureau india limited
Transunion CIBIL limited — summarizes — credit financial and payment information of  600 million consumers to generate consumer CIBIL—-- summarizes — credit financial and payment information of  30 million business —- to generate corporate credit score/ to assess loan risk and price credit
CIBIL – assessment of borrowers creditworthiness based on credit history, repayment history, credit utilisation, credit mix, credit enquiries

3 digit no — 300 to 900 — 720 ideal

Other credit scores
Equifax,CRIF highmark, experian

Q. What are the docs that u will ask if some one comes for loan

Last 3 yrs audited financials, ITR’s, GSTR’s, report of project, Bank statements, salary slip (if inv personal loan)

Check ROC compliances

DPT 3 — return regarding deposits acc/loans taken by co
DIR 3 KYC — DIN holders—whose DIN status approved
ADT 1 — within 15 days of AGM — regarding appointment of Auditor
AOT 4 — within 30 days of AGM — file annual financial statements with ROC in ADT 4
MGT 7 — within 60 days of AGM — file annual return furnish details of company

Pledge Vs Hypo Vs Mort

Mortgage – Mortgage means transfer of right or interest in specific immovable property to secure the money advanced or to be advance, a debt or future debt or any legal monetary liability.
Loan taken to finance an Immovable property where the bank has right over the immovable property to sell and recover if borrower defaults. Ownership lies with the borrower (owner)– ex: home loan

Pledge – Bailment or placing the goods movable property as security for payment of debt or performance of promise
Loan taken by providing a movable property such as Gold, Share, NSC as securities

Hypothecation – Hypothecation is the charge created on movable property which gives the lender a right to take possession and recover the loan incase of default by a borrower.

Collateral

2 types — Immovable props— liquid assets
Assets can be used as collateral only if its value covers the entire loan amount

Immovable props

Residential property
Commercial property
Open non agricultural land
Property with multiple owners (fam)

Liquid assets
Shares
Mutual fund units
Bonds
Gold

Q1.Financial statements of a client has been given what will you check
First I will check whether the borrower has capacity to repay?
To know this
I will check income statement—-to know profitability and whether they will survive in the market – whether they are offering premium goods or services but in low volumes or adapting price sensitive strategies

In cash flow statement —- will check whether the company is generating positive cash flow from operations  — and assess whether the company generates enough cash flows to pay off the debt

Will check the balance sheet to know whether there are enough assets of value to recover the loan in case of bankruptcy of borrower

Ratio analysis
Solvency Ratios vs. Liquidity Ratios Explained (investopedia.com)
Will analyse Liquidity ratios 
Current ratio — 1.5 to 3
Quick ratio
Day sales outstanding  —- below 45 is considered good
Day Inventory outstanding — b/w 30 to 60 days
Day payable O/s
Will analyse Solvency ratios — 
Debt equity – 2:1
Debt to assets — below 1 
Int ser coverage — 3 or more
Debt ser cov ratio — 1.2 or 1.25 is min — 2 is strong
Fixed charge coverage ratio —- at least 1.2 — 2 is considered good
Fixed-Charge Coverage Ratio (FCCR): Examples, Formula, Meaning (investopedia.com)

Working cap gap
Working capital gap is the difference b/w CA and CL (other than bank borrowings)
Positive working cap gap —- CA-CL  > 0
Negative working cap gap — CL-CA > 0

Operating cycle
It is also known as operating cycle
Operating cycle means time taken to convert resources into cash
Total time taken to purchase inputs produce finished goods sell them and receive cash from those sales
Three components

Inventory cycle — total time taken to produce finished goods from the date of purchasing raw materials — (AverageInventory/cost of goods sold)*360
Receivables cycle – day receivable ratio 
Payables cycle – day payables ratio
Operating cycle = Inventory cycle + receivable cycle - payables cycle

MAXIMUM PERMISSIBLE BANK FINANCE
The MPBF method of lending stands for Maximum Permissible Bank Finance. It is a widely used method by banks to determine the maximum amount of credit that can be extended to a borrower. The method is also known as the 'Balance Sheet Method' or 'Traditional Method' of lending.
Under the MPBF method, banks calculate the maximum amount of loan that can be extended to a borrower based on the borrower's working capital cycle. The working capital cycle includes the time it takes for the borrower to convert raw materials into finished goods and sell them to generate cash.
To calculate the MPBF, banks take into account the borrower's current assets and current liabilities. The current assets include cash, stock, debtors, etc., while the current liabilities include creditors, bills payable, bank overdrafts, etc. The bank then applies a certain percentage, known as the margin, to the net current assets (current assets minus current liabilities) to arrive at the MPBF.
The margin is determined based on various factors such as the nature of the business, the borrower's creditworthiness, the industry trends, and the bank's internal policies. The margin is typically between 15% to 25% of the net current assets.
The MPBF method of lending helps banks to determine the maximum amount of credit that can be extended to a borrower, while also taking into account the borrower's working capital needs. It also helps to mitigate the risk of default by ensuring that the borrower has sufficient funds to meet their short-term obligations.

give example of MPBF
Let's say a business has current assets of $500,000 and current liabilities of $250,000. To calculate the MPBF using a margin of 20%, the calculation would be as follows:
Net Current Assets = Current Assets - Current Liabilities
Net Current Assets = $500,000 - $250,000
Net Current Assets = $250,000
MPBF = Net Current Assets x Margin
MPBF = $250,000 x 20%
MPBF = $50,000
So, in this example, the MPBF for the business would be $50,000. This means that the maximum amount of credit that the bank can extend to this business would be $50,000. However, it's worth noting that this is just one factor that the bank considers when evaluating a borrower's creditworthiness. Other factors such as the borrower's credit history, profitability, and repayment capacity are also taken into account.

Two main methods of lending:
Traditional Method or Balance Sheet Method:
The traditional method of lending is also known as the balance sheet method or the Maximum Permissible Bank Finance (MPBF) method. Under this method, the bank determines the borrower's creditworthiness by analyzing the borrower's financial statements, such as balance sheets, income statements, and cash flow statements. The bank assesses the borrower's creditworthiness based on the borrower's current assets and liabilities, as well as their past financial performance. The MPBF method is often used for short-term loans, such as working capital loans.

Cash Flow Method:
The cash flow method of lending evaluates the borrower's creditworthiness based on their ability to generate cash flow to repay the loan. This method involves analyzing the borrower's projected cash flows from their operations and assessing their ability to generate sufficient cash flow to repay the loan. The bank may also consider the borrower's collateral and credit history when assessing their creditworthiness. The cash flow method is often used for long-term loans, such as term loans for capital expenditure or for funding acquisitions.

Bank Guarantee
A bank guarantee is a type of financial instrument that a bank issues on behalf of its client, promising to pay a specified amount of money to a third party if the client fails to fulfill a contractual or financial obligation. A bank guarantee is essentially a form of assurance or security provided by a bank to a third party.
There are different types of bank guarantees, but the most common ones are performance guarantees and financial guarantees. A performance guarantee is issued to ensure that a contract is fulfilled according to the terms and conditions agreed upon by the parties involved. A financial guarantee is issued to guarantee payment of a debt or obligation, such as a loan or a lease agreement.
To obtain a bank guarantee, a client must provide the bank with collateral or security, such as a cash deposit, a letter of credit, or a pledge of assets. The bank will then issue a guarantee in favor of the beneficiary (the third party), outlining the terms and conditions of the guarantee.
If the client fails to fulfill their contractual or financial obligation, the beneficiary can claim the amount specified in the bank guarantee from the issuing bank. The bank will then recover the amount from the client, along with any fees or charges applicable.
Bank guarantees are commonly used in international trade, construction, and other industries where large transactions or projects are involved. They provide a level of security and assurance to all parties involved, reducing the risk of financial loss or default.

letter of credit
A letter of credit, or a credit letter, is a letter from a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount. If the buyer is unable to make a payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase. It may be offered as a facility.

Commercial Letter of Credit
This is a direct payment method in which the issuing bank makes the payments to the beneficiary. In contrast, a standby letter of credit is a secondary payment method in which the bank pays the beneficiary only when the holder cannot.
Revolving Letter of Credit
This kind of letter allows a customer to make any number of draws within a certain limit during a specific time period.
Traveler’s Letter of Credit
For those going abroad, this letter will guarantee that issuing banks will honor drafts made at certain foreign bank
Confirmed Letter of Credit
A confirmed letter of credit involves a bank other than the issuing bank guaranteeing the letter of credit. The second bank is the confirming bank, typically the seller’s bank. The confirming bank ensures payment under the letter of credit if the holder and the issuing bank default. The issuing bank in international transactions typically requests this arrangement.
LTV ratio
An LTV ratio is calculated by dividing the amount borrowed by the appraised value of the property, expressed as a percentage. For example, if you buy a home appraised at $100,000 for its appraised value, and make a $10,000 down payment, you will borrow $90,000. This results in an LTV ratio of 90% (i.e., 90,000/100,000)

There are different clients — one in manufacturing, one in retail, one in wholesale — what is difference in assessment

As a banker, when assessing loan applications from different clients, it is important to evaluate the risks associated with each business, the viability of the business model, and the ability of the borrower to repay the loan. In order to assess these four different clients, I would use the following approach:
Manufacturing Clients:
For the two manufacturing clients, I would assess the nature of their business, their product line, and their production process. I would evaluate their financial statements and cash flow to determine their profitability and liquidity. I would also analyze their market position, including their competition, customer base, and pricing strategy.
For the retail client, I would evaluate their inventory management, sales volume, and customer base. I would also analyze their sales trends and margins to determine their profitability.
For the wholesale client, I would assess their supply chain, distribution network, and customer base. I would also evaluate their inventory management, sales volume, and profitability.
Service Clients:
For the two service clients, I would assess the nature of their business, their service offerings, and their customer base. I would evaluate their financial statements and cash flow to determine their profitability and liquidity. I would also analyze their market position, including their competition, customer base, and pricing strategy.
For the B2C client, I would evaluate their marketing strategy, customer acquisition, and retention methods. I would also assess their service delivery model and customer satisfaction levels.
For the B2B client, I would evaluate their customer base, industry trends, and their ability to provide value-added services to their clients. I would also assess their profitability and cash flow to determine their ability to repay the loan.
Overall, the assessment process for each client would vary based on their industry, business model, and financial position. It is important to evaluate each client individually and tailor the assessment process to their specific needs and requirements.

Partnership Vs LLP
A partnership firm is a type of business structure where two or more individuals come together to carry on a business with a view to profit. The partners share the profits and losses of the business as per the agreement among them. In contrast, a Limited Liability Partnership (LLP) is a type of partnership in which the partners have limited liability for the debts of the business.
Here are some key differences between a partnership firm and an LLP:
Liability: In a partnership firm, the partners are jointly and severally liable for the debts of the business. This means that if the business incurs a debt, all the partners are responsible for paying it, and their personal assets can be used to settle the debt. On the other hand, in an LLP, the partners have limited liability. This means that they are only liable to the extent of their contribution to the LLP and their personal assets are protected.
Management: In a partnership firm, all the partners have an equal say in the management of the business, unless there is an agreement stating otherwise. In an LLP, the partners can choose to appoint designated partners who have more management responsibilities.
Registration: A partnership firm can be registered or unregistered. Unregistered partnerships have certain limitations and cannot sue or be sued in court. An LLP, on the other hand, must be registered with the Registrar of Companies.
Perpetual Succession: A partnership firm is dissolved on the death, retirement or insolvency of a partner. An LLP, on the other hand, has perpetual succession and can continue to exist even if one or more partners leave or die.
Compliance: An LLP is subject to more compliance requirements compared to a partnership firm. An LLP must file annual returns and audited financial statements, while a partnership firm does not have such requirements.
Overall, while both partnership firms and LLPs are types of partnerships, an LLP offers the advantage of limited liability to its partners, along with more flexibility in management and continuity of existence. However, an LLP also comes with more compliance requirements compared to a partnership firm

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